Welcome to the December edition of the Riskalyze Fintech Review, where Riskalyze CEO Aaron Klein gives you the thumbs-up or thumbs-down on the biggest pieces of news to hit advisor technology in the last month. Regardless of your Risk Number, failing to read this piece may be the riskiest move of all!
Ellevest Now Offering Private Wealth Management Services
What happened: Ellevest, the automated advice platform geared toward investment planning for women, launched a more traditional, high-touch service for wealthier investors. This service, the third available on their platform, offers a dedicated wealth manager and personalized investment options to clients with at least $1 million in investable assets. Offering a more traditional wealth management relationship came from client demand and the need to keep up engagement with women as their wealth levels increase, Ellevest said. The Ellevest Private Wealth Management service costs 90 basis points.
Why it matters: There have been several attempts to build a robo advisor focused on women, and it’s no surprise that a venture-backed one like Ellevest would eventually arrive at the conclusion that human advice has great value for the high-net-worth investors, and charging for it can pay the bills for a fee-based investment platform. Smart move by Sallie and team—it’ll be interesting to see how their growth compares to other robos adding human advice, like Betterment.
Fi360 Offering Improved Fee Benchmarker in Toolkit
What happened: Fi360, a provider of fiduciary-related education and technology, announced the release of an enhanced version of its Fee Benchmarker tool, with increased flexibility and customization. Available in Fi360’s Fiduciary Focus Toolkit, Fee Benchmarker compares (and justifies) fees and services relative to other advisors based on any number of criteria. The tool provides access to a database of retirement specialist advisors’ fees and services, which advisors can use to create data-driven reporting.
Why it matters: Advisors want to be able to show that their fees are fair for the services they’re providing, and Fi360 is giving them some fascinating tools to do just that. Data proves value and I predict advisors using the Fi360 Fiduciary Toolkit will be thrilled with these improvements.
House Republicans Come Out to Oppose FIFO Provision in Tax Reform Bill
What happened: A group of House Republicans sent a letter to congressional leaders strongly objecting to the inclusion of the first-in-first-out, or FIFO, provision of the tax reform bill, hoping to have it removed from the final version. Among their arguments: It could impact middle-income retirees and add complexity for long-term investors. These representatives also said the provision could take away from the benefit of new technologies—that automate tax loss harvesting.
Why it matters: While I still think tax loss harvesting is an overused strategy and the benefits have been overhyped, it’s still a valuable tool in the hands of advisors. When acting in a client’s best interests, it made little sense to prevent advisors from using tax loss harvesting when it makes sense. Big thumbs-up to members of the House for speaking up to make sure this capital gains provision didn’t make the cut.
Republican Tax Bill Cuts Advisors Out of the New “Pass-Through Business” Tax Reform
What happened: The new tax reform act cut tax rates, increased standard deductions and child credits, and dramatically cut corporate taxes to drive economic growth, job creation and U.S. global competitiveness. But in a surprise move, the language that delivered a lower tax rate to small businesses that use “pass-through” taxation explicitly excluded financial advisors and investment management firms.
Why it matters: While this was probably a PR move—the media likely would have covered the pass-through provision as “a giveaway to wealthy hedge fund managers” without this carve-out—it still makes little sense. Financial advisors are running small businesses and would have had more money to reinvest in their employees, in technology and in the client experience.
Bitcoin Experiences Volatile December
What happened: The largest digital coin dropped 6.3 percent to $14,913 after a post-Christmas rally. Among rival digital currencies, ripple rose 8 percent, while ethereum and litecoin fell, according to data compiled by Bloomberg. At one point during bitcoin’s slump, the value fell by 44 percent. Bitcoin’s volatility added to an ongoing debate about how to value the digital asset, which has surged about 1,600 percent this year. “Nobody knows the ultimate value of this,” said Edward Stringham, president of the American Institute for Economic Research. “We cannot predict whether it’s going to be zero or $1 million or anything in between.”
Why it matters: Blockchain is a fascinating technology and I’m never one to predict a technology’s failure based on today’s version of it—the space is just too dynamic and anything can happen. But those viewing bitcoin, ethereum, litecoin and others as “investments” are clearly betting on the continued use of those precise coins or blockchains in the future. Given today’s seven-second settlement times (0.06 percent of the Visa network’s speed), it seems more likely that a future version of blockchain yet to gain favor will be the long-term winner in this space. I own no coins, and I’m perfectly happy to “miss” this opportunity for now.
Fintech Startup Lemonade Secures $120 Million in New Funding
What happened: The New York-based startup, which uses artificial intelligence and bots to minimize paperwork and speed up the claims process for renters and homeowners, secured a $120 million round of funding led by SoftBank Group Corp. Lemonade first launched in September 2016 as a licensed insurance carrier offering homeowners and renters insurance in New York and expanded licenses in over 25 states during 2017. While the firm isn’t disclosing its valuation, some estimate it to be more than $500 million. The new funding is earmarked for expanding into global markets in 2018.
Why it matters: Filing insurance claims is no picnic and Lemonade’s success shows what happens when fintech sets its sights on common problems. I’m excited to see how their claims technology could apply to other applications like account opening in wealth management.
Robo Advisor M1 Finance Cuts Fees to Zero
What happened: M1 Finance, a Chicago-based automated investing platform, removed fees for all of its customers regardless of their account balance. Previously, the startup had tiers based on assets under management (the highest no more than 0.25 percent). The digital advisor defended the decision, saying it’s better off making money on the back end by lending securities to short sellers and money like a bank. “Banks take in consumer deposits and then go lend it out,” said Brian Barnes, M1’s chief executive officer and founder. “We can similarly do that with the cash as well as the securities that people hold, and make interest on that.” While M1 is still a small player in the industry, many see the trend toward lower fees continuing or even accelerating. “Vanguard will soon offer the first S&P ETF that instead of charging typical asset-under-management fees, will pay customers a nominal amount to subscribe,” Tyler Sosin, principle at Menlo Ventures, said in an interview. M1 sees this coming, which is why it’s getting out in front of the wave.
Why it matters: On the one hand, this is perhaps a huge commentary on the value of automated investing services. How do Wealthfront or Betterment justify their fees for the all-digital services they provide? On the other hand, this also demonstrates the value that moderate to high-net-worth individuals place on human advice. Either way, if M1 Finance gets any traction, watch for them to follow the same playbook and bring human advice into the mix in order to actually make money.
Walmart Teams Up with Even for Instapay Service
What happened: The company announced a new “Instapay” service for its 1.4 million workers. The service will allow Walmart workers to access, before payday, half of the wages they have already earned, with no restrictions on when they can withdraw. Instapay is part of a personal finance app called Even, which lets hourly and salaried workers plan ahead for bills, make savings goals and create budgets. Financial tech company PayActiv is also collaborating on Walmart’s Instapay service. “We’re investing to give our people financial tools that help provide more stability in their lives, which we believe will empower them to be all they can be when they are at work serving our customers,” said Jacqui Canney, Walmart’s chief “people” officer, in a prepared statement.
Why it matters: Having access to money in emergencies is something hourly workers have struggled with, and a big corporation like Walmart making this kind of step is very interesting. Walmart is the Number One employer in several states, so this could have more impact than many realize. Giving employees these kinds of tools is no small investment, especially for a company like Walmart. Will it cut down on predatory payday loans? Will other companies follow suit? We’ll be interested to see what kind of results this has down the road.
Capital One Announces Data Share Agreement with Clarity Money
What happened: Capital One Financial Corporation announced an agreement with Clarity Money allowing Capital One customers to more securely import their financial data to Clarity Money. Capital One’s application programming interface provides transparency and helps consumers share their financial data with trusted third parties in a way that is within the consumer’s control. “We know that many of our customers rely on financial tools, and they want companies to have access to the account information necessary to power these tools. The agreement with Clarity Money helps achieve that goal in a way that is secure, transparent and under the customer’s control.” said Becky Heironimus, vice president of Enterprise Digital Products and Data Connections at Capital One. Capital One customers can utilize the API to access Clarity Money’s personal financial management tools without providing login credentials, making the connection a more secure option for vulnerable data.
Why it matters: The less login information floating around, the better. Cybersecurity was a big story in 2017 and will continue to be through 2018. Why aren’t all banks offering API-based data integration via OAuth at this point?
Morgan Stanley Launches Robo Advisor
What happened: Morgan Stanley launched Access Investing, their online advice platform with model portfolios catering to the investment styles of younger investors. The platform is intended to bring better efficiency to Morgan Stanley advisors for their existing clients and also meant for investors who don’t meet the qualifications to work with an advisor. The idea is that these smaller accounts will eventually transition into a more traditional advisory relationship as they accumulate assets and their financial needs become more complex. The investment minimum to open an account is $5,000, and all accounts are charged a fee of 35 basis points of assets under management. There are no other account service or termination fees, but investors could incur additional fees and expenses from the funds they own in their account.
Why it matters: This doesn’t seem like a good way to attract Morgan Stanley’s future client base. This down-market push to copy Merrill Edge doesn’t make as much sense to me since Merrill is getting access to the broad consumer base from Bank of America. But perhaps Morgan Stanley’s Discover card business gives them some way to make this a viable and needle-moving business for them. I don’t think a single financial advisor clicked through to read this story when it hit … it’s just a non-event for them.
